How Did a Relatively Small Number of Subprime Loans Cause a Record Crisis?

A number of analyses of the U.S. and global crisis begin by attempting to explain what they assume to be a paradox -- how could so small a market segment (subprime housing and CDOs backed by subprime) have caused (1) the largest financial bubble in history, (2) a U.S. economic crisis, and (3) a nearly global crisis? To these scholars the obvious answer is that subprime lending could not have caused this traumatic trifecta. It follows that the importance of subprime lending must be overstated and there must be other, more powerful causes of the trifecta.

I will show that the focus on subprime loans was excessive and allude briefly to the points I have made in prior columns about the variant causes of the global crisis. The next column will address in more detail how criminologists determine the true incidence of mortgage fraud. Subprime loans were and are a serious problem, but there has been a destructive overemphasis on subprime loans as the core of the U.S. crisis. "Liar's" loans are a far greater problem, and most problem subprime loans are actually liar's loans. While the nonprime mortgage industry's preferred euphemisms were "alt-a" and "stated income" loans, it was the industry that accurately dubbed them liar's loans. It was the industry that created liar's loans and it is liar's loans that made so many officers wealthy.

The industry pitched liar's loans to the regulators on a series of bright shining lie -- that they were equivalent to the risk of prime loans and simply underwritten on an alternative basis because the borrowers were entrepreneurs who could verify their incomes. The further lie was that liar's loans were distinct from subprime loans, which were only made to those with serious credit defects with conventional underwriting. The reality is that there is an easy means for small business owners to verify their income -- by authorizing the IRS to provide information from their tax returns to the lender via IRS Form 4506. There were two groups of borrowers who had acute needs to avoid disclosing their income and wealth -- those engaged in tax fraud evaders and those seeking to deceive their spouses or defraud their prior spouses and children in order to evade alimony and child support payments. (Remember when one of "C's" in lending referred to "character" and we taught loan officers why one should not lend to those of bad character?) People who will cheat their kids are certain to be willing to cheat their lender.

The purpose of liar's loans was to create endemic fraud throughout the mortgage process - from origination to the sale of collateralized debt obligations (CDOs) backed by liar's loans ("cradle to grave" fraud). The lies in liar's loans were so endemic and so egregious that the financial version of "don't ask; don't tell" was essential at every step of the process. Liar's loans were also perfect for the loan origination level variant of "don't ask; don't tell."

Liar's loans were not underwritten. The borrower did ask about income, but only in the sense made famous by Monty Python ("wink, wink; nod, nod"). The lender agreed that it would not verify the borrowers' "stated income" (and often the borrowers' jobs and assets). As I have explained in prior columns, the lenders that specialized in making liar's loans frequently outsourced much of the job of finding the borrowers who would take out the liar's loans to loan brokers. Studies by various state attorney generals, white-collar criminologists, and private and public investigators have confirmed that it is lenders and their agents (loan brokers and loan officers) who overwhelmingly put the lies in liar's loans. There are independent analytical reasons to believe these findings.

1. Doing so maximized the lenders' (and their loan brokers') reported (albeit fictional) income (and their controlling officers' bonuses). The greater the stated income, the more likely the loan would be made, the larger the size of the loan, and the greater the resale value of the loan in the secondary market. Each of these elements drove the agents' and loan officers' compensation up - and by very large amounts.
2. By inflating the borrowers' stated income, the lender and its brokers could make the loan appear to be less risky and sell it for a premium to the secondary market greatly inflating the borrower's stated income. The liar's loan lenders could also make the loan appear to be less risky to the regulators (though unregulated mortgage bankers probably made most of the liar's loans), credit rating agencies, and auditors. These entities typically treated the (fictional, far reduced) "debt-to-income" ratio arising from inflating the borrower's stated income as if it were real. (In reality, this willingness to believe, without real due diligence, the lies that would make these professionals wealthy was another variant of "don't ask; don't tell.") It was not exactly difficult for anyone in the trade to figure out that must never treat as truthful the stated income in something the trade called a "liar's" loan. Indeed, the ability of everyone in the trade to know that they should never treat the loans as honest was made even more simple when the mortgage lending industry's own experts as deserving of that label because such loans were "an open invitation to fraudsters" (MARI 2006) - during what the FBI had termed as early as September 2004 to be an "epidemic" of mortgage fraud. Depressing the real debt-to-income ratio by inflating reported income was a useful lie to everyone with a financial stake in the liar's loan machine - which was most of our largest financial firms in the U.S.
3. Not verifying the borrowers' stated income simultaneously facilitated the lenders' and their brokers' ability to sell fraudulent loans at a premium in the secondary market and minimized risk of the lenders' and their brokers' controlling officers being sanctioned for their frauds essential to their origination and sale of liar's loans. The brokers and lenders obviously, could not verify the fictional incomes that they had inflated. They would have had three choices. They could have honestly sought to verify something they knew to be false - which would have prevented the loans from being made and dramatically reduced their income. They could have claimed that they had verified the income but provided no records of their efforts at verification or the borrowers' true income. That strategy would have added another act of fraud (a false certification of verification) while providing no credible evidence. The other alternative would be for the brokers and officers to forge documents purporting to show that they had conducted due diligence as to the borrowers' true income and attesting to the accuracy of the stated income. This strategy would have made it simple for the Justice Department to convict the loan brokers and officers. The ideal strategy is for the loan brokers and officers to do no underwriting of the stated income and to purport that the borrowers' credit rating (FICO score), in conjunction with the fraudulent LTV and debt-to-income ratios, proves that the loan has risk characteristics equivalent to prime loans. FICO scores, of course, can never demonstrate that the borrower has the capacity to repay a home loan and there are common scams that use someone with a good FICO score as a shill to obtain a loan.

Liar's loans were equally useful in facilitating accounting control fraud by those involved in the CDO process. The secondary market had to rely on "don't ask; don't tell" to be able to securitize and sell CDOs. CDOs were largely backed by liar's loans and fraud was so endemic and so obvious among liar's loans if one engaged in due diligence that it was ideal to claim that liar's loans required no meaningful due diligence and could not be the subject of meaningful due diligence because there were no underwriting files to review because the lender did no real underwriting. Again, consider what would have happened if the securitizers, credit rating agencies, or auditors had actually looked at any reliable sample of the liar's loans for evidence of fraud. They would have reported, as did Fitch in November 2007, that there was evidence of fraud in the nearly every file. If they asked, they could not sell. Their files would show that they knew they were knowingly selling securities backed primarily by fraudulent loans - and claiming the CDOs were "AAA."

Liar's loan borrowers had no leverage to create a "Gresham's" dynamic among appraisers. There is no honest reason why a mortgage lender would inflate the appraised value and the size of the loan. Causing or permitting large numbers of inflated appraisals is a superb "marker" of accounting control fraud by the lender because the senior officers directing an accounting control fraud do maximize short-term reported (fictional) income (and real losses) by inflating appraisals and stated income. As I have noted, and will return to in future columns in more detail, lenders and their agents frequently suborned appraisers by deliberately creating a Gresham's dynamic to try to induce them to inflate market values, leaked the loan amount to the appraisers, drove the appraisal fraud, and made it endemic. As with inflating income in order to minimize the reported debt-to-income ratio, inflating the appraisal allowed everyone with a financial stake in the lies to minimize the reported loan-to-value (LTV) ratio and allow everyone to pretend that the loan was far less risky because it had such a large (but yet again fictional) equity cushion. Given that we know that appraisal fraud was endemic, that endemic appraisal fraud is impossible without being led or permitted by the lenders and their agents, and that no honest lender would permit or cause widespread inflated appraisals, the logical inference is that the lenders and their agents led both the stated income and the appraisal fraud.

Only the lenders and their agents had the inside information and expertise to know how to optimize the deceit in the loan application process. Many of the housing speculators who bought a material number of homes and sought to flip them were industry insiders, and many of them also committed fraud by indicating that they intended to make each of the houses (simultaneously) their principal dwelling. These professionals would have known of the details of the lenders' term sheets and could have picked the debt-to-income and LTV ratios (and sometimes had illegal side deals with appraisals to inflate the appraisals to secure the desired LTV. The great bulk, however, of those that borrowed through liar's loans were not financially sophisticated and had no way of knowing how much they needed to inflate reported income to hit the "sweet spot" that would maximize the loan broker's and the loan officer's fees and bonuses. Loan brokers willing to specialize in making liar's loans had to be able to lead the lies about the borrowers' income that would maximize the loan broker's fees.

The fact that the lenders and their agents specializing in making liar's loans led the stated income frauds does not, of course, mean that the borrowers had no ethical responsibility or culpability. As I will show in future columns, there are millions of cases of mortgage fraud through liar's loans. There are doubtless hundreds of thousands of borrowers who knew that the incomes the brokers and officers told them to report on the loan applications were false.

Yes, it does appear to have been common for the loan brokers and officers to create the false loan applications and even forge the borrowers' signatures. Some of the lenders are reported to have referred to these practices as "Arts and Crafts" weekends. We don't know how common this level of lender fraud was because the regulatory agencies and prosecutors have not publicly reported their investigations. Indeed, there is no public evidence that the regulators or prosecutors are even conducting comprehensive investigations of the endemic accounting control fraud by the lenders that made large amounts of liar's loans.

We now have the analytical basis to begin to explain the supposed paradox as to how such a relatively small number of subprime loans caused an intense global crisis. Here are the central points, which I will flesh out in future columns.

• Many subprime loans were also liar's loans
• Many hybrid loans existed with greatly reduced underwriting
• There were, and are, no official definitions of the loan categories "alt-a", "subprime", or the many hybrid forms
• Because there is no definition and the categories of "subprime" and "liar's" loans are not mutually exclusive, there is inherent uncertainty and a need to use judgment to form useful estimates. Credit Suisse reported (2007) that 49% of new originations in 2006 were "alt-a" loans (i.e., liar's loans). The incidence of fraud among liar's loans found in most independent studies is 80% or above. If the Credit Suisse figure is even close to accurate (and some caution is vital there), then we are suffering from over a million cases of mortgage fraud annually in 2005 and 2005 and the frauds were growing in 2007 until the secondary market collapsed. Data on criminal referrals are, when extrapolated, consistent with that level of fraud incidence. The supposed paradox arises from a factual error. Nonprime loans were common. Liar's loans grew massively and hyper-inflated the financial bubble. The size of the bubble and the fraud losses were enormous relative to bank capital. Indeed, the very lack of reliable data on the true composition of liar's loans (Fannie, Freddie, and Lehman all reported them as "prime" loans for most purposes) in mortgage portfolios and CDOs was itself one of the factors driving systemic risk. Investors, rightly, feared that most large financial institutions had huge exposures to fraudulent loans.
• At law, fraud's defining element is deceit. The fraudster gets the victim to trust him and then betrays that trust. This is why control fraud by our elite financial institutions is such a powerful acid to erode trust. Trust is vital to an effective economy. Markets shut down in the crisis because bankers no longer trusted other bankers' asset valuations.
• Other nations (Iceland and to a far lesser extent Ireland) that have had moderately serious investigations of the causes of their crises have produced reports that provide compelling evidence of accounting control fraud as major drivers in their crises. Spain is notorious for its' banks' accounting abuses, but Spain has not provided any true investigative reports.
• The FDIC and OTS created a data base well after the crisis began. It sought (false) precision at the cost of analytical usefulness. It creates a false dichotomy between "alt-a" and "subprime" based on reported FICO scores (which it implicitly assumes to be real). The result is that one cannot use the data to study loans made without underwriting. That category - the single most important characteristic for studying, measuring, and predicting losses - does not exist in their data. It is vital that researchers understand that the FDIC mortgage data base is unreliable and it is vital that the FDIC create a new, reliable data base.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

This column appeared originally in Benzinga.

 

Comments

[littlebethieme]

08:21 AM on 01/05/2011

As a former mortgage underwriter I agree with most of these comments (except pastgone...he is wrong). the regulators let the investors create these monsters, the lenders jumped on it for the income, many of the brokers were crooked or at least shady - they didnt know anything about mortgages except how to calculate their fees. Many many underwriters tried to avoid the loans, esp the ones with blatant lies, ie. a drugstore clerk who make over $100000. But time and again we were told "it fits the guidelines, so you must make the loan". Besides the liar loans, there was the low credit score rule. Even FNMA allowed an "EAIII" loan (expanded approval) for 100% loan to value, with a 510 credit score, no money in the bank, a 50% debt to income ratio (0n gross income yet) and a previous bankruptcy. It fit, so the loan had to be made!!! Needless to say, the borrower never made the first payment. And even if we found proven fraud, nothing was done. the lender who found the fraud did not do future business with them, but no other lender was notified. Any underwriter with 3 years experience knew these loans would explode. What I didnt know was that they were then being packaged and sold as "A" paper. Wall Street created the monsters and the crooks jumped on the bandwagon. I finally had enough and just left. Now the entire country must pay for the greed of an industry.

[Genders]

10:04 PM on 01/04/2011

The home loans were the cards at the Bankster's gambling table. The real money, the Chips were and are Swaps deregulated Derivatives. That's what caused the crash.

[muck-raker]

05:01 PM on 01/04/2011

I can remember the story coming out of Calif. that a PIZZA delivery boy got involved with mortgages and quickly he was making a MILLION a month!!!! many Realtors were buying properties with no money down and in a year or two were making untold amounts of money...The real story, I think is when Brooksley Born was threatened NOT TO REGULATE Derivatives by Greenspan, Rubin, Summers...Why.....The Biggest Heist of all time WAS BY DESIGN...here is a widely acclaimed video by Frontline PBS...that explains in detail....this is a very informative video and when you have seen all 55 minutes of it YOU will Wonder Why did NO ONE GO TO JAIL?
http://video.pbs.org/video/1302794657/

[cloudjungle]

01:53 PM on 01/04/2011

Another helpful read would be 'The Big Short'. Lenders were looking for people that had thin credit scores meaning they had little to any debt history. These made the bundled assets look secure on the surface but very bad if one looked deeper. Lenders made no attempts to do anything but make the loan and mover on. Once they found they could bet short on these 'assets' they were falling all over them selves to do so. I guess 'money changers' never really change.

[muck-raker]

04:28 AM on 01/05/2011

here is the story on the Money Changers, everyone should watch it.....Favd

http://video.google.com/videoplay?docid=6076118677860424204&hl=en&emb=1#

[Ralph]

12:53 PM on 01/04/2011

"Trust is vital to an effective economy."

That's putting it mildly. But trust cannot be reestablished in the US at the moment, because too much of our economic activity consists of just buying and selling. Importing goods for resale is not production. Still less is buying and selling securities. Less yet still is buying and selling securities ever more distantly based on the value of other securities.

Without enough real production happening, there are limited ways for individuals to earn an honest living. Conversely, when much pseudo-economic activity is going on, the temptation for people and organizations to inflate the value of assets becomes strong. Then, as underlying value continues to thin, ongoing buying and selling readily morphs into lying and swindling (it's a way to keep busy).

The history of human beings is largely the history of our creation and use of artifacts, including highly complex tools and manufactured goods. Until more Americans are involved - even peripherally - in creating artifacts ("goods"), we won't be able to build up much deep trust in people and institutions.

[Ppossom]

11:32 AM on 01/04/2011

This is an excellent article. Should be reprinted in "Red State."

[Henry]

10:51 AM on 01/04/2011

There is one think that most people do not understand about the home appraisal and that is the value of the home being appraised must be supported be three comparable homes that have recently sold in the market place. It is understandable that in places like Florida, Cal, and Las Vegas where housing prices are on the increase due to lower market rates that this causes an increase to all homes yada yada. However once this gets to be a trend (values increasing) it becomes the cows getting bloated. It does not stop until it dies. This is a sickness that pervades a gullible public. For example we've all heard politicians talk about the never ending historical rate of return of the stock market at 15%!!! Well here we are again. Let me sell you this house and if you cannot make the payments... sell it, you'll make a return on the increase to values (the limit of gain will approach infinity)

[Inkosi]

11:29 AM on 01/04/2011

F&F -

[weekendpartier]

10:13 AM on 01/04/2011

Of course, none of this information is new. As far back as 2004, the Case-Shiller Index indicated a bubble in house prices. Why are we still talking about the causes instead of punishing the rich, corporate, fat-cat bankers who had the power to say "No," to risky home buyers? Why did the big banks get bailouts, but the average worker hasn't? A measly unemployment extension is not a bail out!

[Inkosi]

11:33 AM on 01/04/2011

The bankers robbed the poor - there is no punishment for that. The poor deserved it. - or so they believe. The poor do not deserve any bailout. Only when they robbed the rich did they get prosecuted -like Bernie Madoff, and only one guy from Goldman Sachs - they picked the wrong victims. And the Banksters were innocent viticms of the lying poor

[studly69]

10:46 PM on 01/04/2011

How about punishing those responsible for allowing all of this to take place? Namely those in Washington!!!!

[AMERICANBANKSTER]

09:55 AM on 01/04/2011

What started the recent recession was after the first mortgage fund developed some defaults in 2007 (only some, not all defaulted) the warehouse banks clamped down on the mortgage bank lenders short term credit lines causing the whole mortgage industry fail. Job and income losses abruptly caused most of the ensuing foreclosures. The banks actually caused the entire crisis by putting so much money into the American economy through securitization that the prices of housing rose dramatically in value. When the cracks in the system first appeared they ran for the hills and caused the entire U.S. economy to collapse. While some loans were not 100% accurate, that did not cause the crisis because most could afford the payments at origination. This ongoing crisis was ultimately caused by the lender banks overindulgence (greed) and the FEDS lack of oversight (politics) in the matter. Please refer to Ben Bernanke's Sept 5 interview on 60 minutes where Bernanke said the FED was lax on regulation of the "Crazy Lending" by the banks it regulated. My recommendation is to stop all foreclosures and individually determine the true financial hardship caused by the recession. Then our leaders should develop firm rules that the banks must follow in modification and open the gates of who qualifies for modification.

[denny8844]

02:48 PM on 01/04/2011

When the foreclosures started in 2006 in the 4 states that had 50% of the US foreclosures, CA FL NV and AZ their unemployment rates were all under 5%. So your timing is not correct. What caused the foreclosures were houses that were too expensive to be supported by the family income and those families got mortgages that were 5 or 6 or 7 times the annual income of the family. The brokers used what are called Payment Option ARMs which allowed the payments to be much much less per month than a fixed 30 year mortgage. Those mortgages were made in the 2002-2005 time frame but when they came up for reset in 2006 and 2007 and had to go to a higher monthly payment the families could not afford them. The high unemployment did cause the foreclosures in 2009 and 2010 but not at the very beginning

[AMERICANBANKSTER]

08:29 AM on 01/05/2011

The "Payment Option Arms" were Countrywide's negative am loans only. Each lender had their own version under a different name. The Payment Option Arms were unveiled by Countrywide in 2004, see Adam Michaelson's book The Foreclosure of America" and were just getting rolling in late 2004. Interest rates were raised 17 times by the FED between 2000 and 2005 and yes, that cause some loan defaults in the lower income sector, but the largest wave of defaults hit between 2008 and the present with most defaults from those financially affected by the recession. Again, the recession was caused by 1. Banks using Wall Street Too aggressively - the BUBBLE 2. Banks irresponsible touting of negative am sub prime mortgages and 3. the FED lowering lending qualifications and not doing their job.
The actual crisis was triggered by the short term warehouse lenders who panicked when they saw some defaults in the Bear Stearns #1 fund in late 2007. That caused the snowball to begin rolling down the mountain toward the village of unsuspecting U.S. citizens. Many who did not have subprime mortgages. Banksters now owe the little guys big time.

[themodernleader]

10:58 PM on 01/03/2011

     The more I read Professor Black's analyses of this fraud the better I understand the systemic nature and its wide spread throughout to corrupt our nation.  How were ordinary people reined in to this theft?  I was told by one person that he was given 8,000 dollars at the closing under some pretense after he had purchased a multi-flat property.  I questioned his credibility.  He kept repeating the same statement.
    In another case, a person was given an estimated two thousand dollar cash settlement for purchasing a property that she never moved into or never rented.  It went from sold to foreclosure. 
    The fraud originated with the bank CEOs.  They ended up with millions and millions.  Not one CEO has been formally questioned or indicted.  They are now advising the President of our  United States.

[greyhound2]

11:37 AM on 01/04/2011

That's the worst part. Nobody has been questioned, indicted, reprimanded or charged, let alone gone to jail. Especially those in the rating agencies, whose only saleable item is their integrity who lied, cheated and stole. It is a black day when trust went down the toilet. Once trust is gone, it is almost impossible to get it back.

[RedRat]

10:21 PM on 01/03/2011

Well of course liar's loans are a major factor. Hey, If I really make only $20K a year and go into a lender who doesn't care about my financial ability to repay the loan, then heck I can get a loan for a $1million home. Sure I may not be able to make the monthly payments, but the lender has already sold my contract to sucker. Both sides knew that it would take a year to foreclose the house. In the meantime, during the bubble, that house in one year has appreciated by about 20-30% and if I, or the paper holder, can sell the home for $1.2 to $1.3, to a legitimate buyer, who cares, they walk away with a cool $200K to $300K. Better yet, with bubble rates of 20%+ they may even resell the home to another liar, who knows. Keep in mind that this went on for about 5 years, these homes doubled in price, the amount of worthless paper is enormous, virtually all homes and mortgages written during that bubble period are impacted. Face the fact, most equity in homes ephemeral. You only recognize that equity when you sell your home and you have the cash in hand.

[muck-raker]

05:03 PM on 01/04/2011

RedRat excellent post..F&F.see my Frontline video on this thread

[charlesbaratta01]

05:28 PM on 01/03/2011

The small businesses are getting ignored in these issues, especially when looking for small business loans or financing.
The big corporations don’t seem to have an issue raising money by selling bonds, big bank loans. Small business loans aren’t getting approved that’s why so many are looking to business cash advances to leverage their credit card receipts.

Charles Baratta
http://www.merchantloans.com

[pastgone]

04:32 PM on 01/03/2011

You people are totally crazy. I can't believe it goes on and on, blaming this and that and the other thing. It's subprime loans, it's "liar's loans", it's derivatives, it's predatory lending, it's the banks, it's Wall Street, it's deregulation.

Let's not get all opaque with smarty-pants stuff, like these guys love to do. What happened in America is, real estate prices went through the roof, and then, inevitably, they collapsed. They collapsed because they were allowed to go through the roof in the first place. Real estate values in this country nearly tripled during the years 2001-2007. That's the "real estate bubble"--and it had to collapse, and it did.

So the real problem isn't any of this other crap. The REAL PROBLEM is that real estate values tripled in a seven year period. That alone triggered this crisis. And "liar's loans" didn't cause this, and "subprime loans" didn't cause this, and blah blah blah didn't cause this.

During this entire period of time, you could get a mortgage for historic, record low interest rates. I repeart, interest rates during the years 2001-2007 were left at historic lows, while housing prices tripled. The Fed is supposed to raise interest rates to head off an overheating housing market. THEY DID NOT--and THAT caused this crisis.

Why did Greenspan ignore warning after warning, and leave interest rates at historic lows? That is the issue here, and not subprime loans, or any of this other malarkey.

[OldTulsan]

04:57 PM on 01/03/2011

Professor Black is an established regulator who was instrumental in sending over 1,000 people to prison during the S&L crisis:

http://online.barrons.com/article/SB123940701204709985.html#articleTabs_panel_article%3D1
The Lessons of the Savings-and-Loan Crisis - Barrons.com

"WILLIAM BLACK CALLS THEM AS HE SEES THEM, which is why we enjoy talking with him. Black, 57 years old, was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves as an associate professor, teaching economics and law at the University of Missouri, Kansas City. At FSLIC, a government agency that insured S&L deposits, Black prevailed in showdowns with the powerful Democratic Speaker of the House, Jim Wright, and helped identify the infamous Keating Five, a group of U.S. senators (including Sen. John McCain, the Arizona Republican who lost his bid for the presidency in 2008) who tried to quash his attempt to close Charles Keating's Lincoln Savings & Loan. Wright eventually resigned amid unrelated ethics charges, and the senators were reprimanded for poor judgment. Keating went to jail for securities fraud...

Barron's: Just how serious is this credit crisis? What is at stake here for the American taxpayer?

Black: Mopping up the savings-and-loan crisis cost $150 billion; this current crisis will probably cost a multiple of that. The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid's doll set..."

[midasw]

06:20 PM on 01/03/2011

Never forget that financeability drives pricing. A house that's 90% financeable will command a higher price than a comparable residence on which only 50% financing is available. A borrower whose "stated income" allows him to borrow,say, $50,000, can pay more than a borrower whose actual income limits his borrowing power to $40,000.

[outnow]

04:04 PM on 01/03/2011

The mania in real estate was essentially caused by a Ponzi scheme with the last buyers in getting stuck with large loan balances and little or no equity. Those who refinanced and drew out equity believed that real estate would go up forever. Those who purchased the securities got screwed, yet nobody went to prison.

I am familiar with securities control frauds and predatory lending and witnessed subprime and liar's loans being given to worse and worse borrowers. It was out and out fraud at every level.

If these people are not prosecuted, then how can other less serious crimes result in people getting long prison terms?

There is now a two-tiered criminal justice system granting Wall Street insiders a get out of jail free card while they enrich themselves and destroy the world economy. Thet get multimillion dollar bonuses instead of a cot and three hots.

[OldTulsan]

04:58 PM on 01/03/2011

Bankers aren't even sent to prison for laundering drug money:

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=asU.b_fCjHTE
Wachovia's Drug Habit - Bloomberg.com

"...The bank didn’t react quickly enough to the prosecutors’ requests and failed to hire enough investigators, the U.S. Treasury Department said in March. After a 22-month investigation, the Justice Department on March 12 charged Wachovia with violating the Bank Secrecy Act by failing to run an effective anti-money-laundering program.

Five days later, Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009..."

[outnow]

05:12 PM on 01/03/2011

Amazing article. Thanks.

Drug cartels cannot launder money without banks but a prosecution would cause a run on the bank, and the banks are too big to allow to fail. So weapons and drug proceeds are routinely laundered. Thousands are dying in Mexico because of the cartels fighting with the police.

[greensachs]

02:51 PM on 01/03/2011

R U Sure?

How can this possibly be professor Black? Every media source has established the crisis to be "Those Public Employees" fault....
This finding comes out of their marvelous investigative journalistic diligence, of course.